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Chapter 8

ECON 1000 Chapter Notes - Chapter 8: Demand Curve, Spreadsheet, Economic Surplus


Department
Economics
Course Code
ECON 1000
Professor
All
Chapter
8

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Econ 1000 chapter 8
Consumpon Choices
oConsumpon possibilies
All the things you can aord to buy
Limited by income
Consumers budget line
Limit to consumpon abilies due to income
Boundary between combinaon of g/s that household can aord
to buy and those they cannot aord
Figure 8.1 P. 178
Change in Consumpon possibilies
Change when income or prices change
oRise in income shi"s budget line outward but slope
unchanged
oPreferences
Descripon of someone’s likes and dislikes
Determines demand and marginal bene&t
Use of ulity
Bene&t that a person gets from the consumpon of g/s
Total Ulity
Total bene&t person gets from consuming g/s
Depends on level of consumpon – more consumpon = more
total ulity
Marginal Ulity
Change in total ulity that results from one-unit increase in
quanty of a good consumed
Table 8.1 p. 179
Posive marginal ulity
oThings people enjoy and want more
oTotal ulity increases as quanty consumed increase
Diminishing marginal ulity
oDecrease in marginal ulity as consumpon increases
oThe more you consume, the rate of increase in ulity
decreases
Graphing Lisa’s Ulity Schedules
Figure 8.2 P. 180
More pop you consume, increase in TOTAL ulity
oCurve slopes upward
More pop you consume, decrease in MARGINAL ulity
curve slopes downward
Ulity Maximizing Choice

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oSpreadsheet Soluon
Find the Just-A,ordable Combinaon
Table 8.2
Combinaon to aord maximum total ulity
Must be INSIDE the budget line
Both products should be posive marginal ulity
Find the Total Ulity for Each Just-a,ordable Combinaon
As menoned, &nd maximum ulity
Consumer Equilibrium
Consumer has allocated all of their available income in way that
maximizes total ulity, given the prices of g/s.
Table 8.2 p. 181
More comfortable way in &nding consumer equilibrium – choosing
at margin
oChoosing at Margin
Marginal Ulity per Dollar
Marginal ulity from a good that results from spending one more
dollar on it
Marginal Ulity Per Dollar = Marginal Ulity / Price
Ulity Maximizing Rule
Spend all the available income
oMore consumpon brings more ulity
Equalize the Marginal Ulity Per Dollar
oMove dollars from B to A if increases ulity from good A
by more than it decreases ulity from good B
Buying more of good A decreases marginal ulity
Buying more of good B increases marginal ulity
Total ulity rises
Gap between marginal ulies per dollar
decreases
Lisa’s Marginal Calculaon
Figure 8.3
Use the graph, calculate the marginal ulity per dollar using the
slope, and compare the two variables unl they equal each other
in marginal ulity per dollar
Power of Marginal Analysis
If marginal ulity per dollar from movies > m.u.p.d for pop
oSee more movies and buy less pop
oWorks vice versa
If marginal gain from an acon exceeds marginal loss, take the
acon
Revealing Preferences
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